RBI takes measures to absorb excess liquidity

November 26, 2016 10:31 pm | Updated 10:46 pm IST - MUMBAI:

The Reserve Bank of India (RBI) has taken steps to absorb excess liquidity in the banking system following demonetisation and said banks have to maintain 100 per cent cash reserve ratio (CRR) for the deposits they have received between September 16, 2016 and November 11, 2016.

The central bank clarified that the overall CRR requirement would stay at 4 per cent and the move will come into effect from the fortnight beginning November 26.

CRR is the proportion of deposits that banks have to keep as cash with the central bank.

Banks do not earn any interest on CRR balances kept with the RBI.

The RBI withdrew the prevailing Rs.500 and Rs.1,000 notes on November 8 and banks started depositing and exchanging those notes from November 10.

“On the increase in NDTL (net demand and time liabilities) between September 16, 2016 and November 11, 2016, scheduled banks shall maintain an incremental CRR of 100 per cent, effective the fortnight beginning November 26, 2016,” according to a RBI statement.

“This is intended to absorb a part of the surplus liquidity arising from the return of specified bank notes to the banking system, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy.”

The central bank said the incremental CRR requirement is intended to be a temporary measure and within its ‘liquidity management framework’, and will be reviewed on December 9 2016 or even earlier.

According to latest RBI data, deposits in banks swelled by Rs.3.24 lakh crore between September 16 and November 11.

The last fortnight of September saw deposit mobilisation jump by Rs.3.5 lakh crore.

Marginal impact

According to bankers, the move was likely to have only a marginal impact on bank’s cost of funds since it was a temporary measure.

“Since this will suck out liquidity from the system, bond yields could harden,” said a head of treasury of a private sector bank.

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